Grand Coalition will help reduce industrial costs

Many Germans have been undecided in the run-up to this week’s general election but the industrial and financial communities have long seen the formation of a Grand Coalition as the best result. This coalition, between Helmut Kohl’s Christian Democrats and Gerhard Schroeder’s Social Democrats, is the most likely outcome if neither of these two main […]

Many Germans have been undecided in the run-up to this week’s general election but the industrial and financial communities have long seen the formation of a Grand Coalition as the best result.

This coalition, between Helmut Kohl’s Christian Democrats and Gerhard Schroeder’s Social Democrats, is the most likely outcome if neither of these two main parties gain absolute majorities in the Bundestag, or lower house.

Industrialists say this would help keep alive moves towards reform in areas like corporate taxation, which are seen as vital in the push to make Germany a more attractive manufacturing location.

German companies have been fleeing painfully high taxes and social costs to set up in lower-cost countries. And foreign investors can manufacture much more cheaply elsewhere, so are not looking to move in.

Under Kohl, labour reform has been achieved notably in the reduction of benefits to sick workers but the process has been painfully slow because the Christian Democrats have not had a sufficient majority in the Bundesrat, or upper house, to push changes through.

A grand coalition would overcome this problem, opening the way for urgently needed overhauls of the job market, taxation structures and pension schemes, industrialists say.

An outright win for Kohl would see reforms held up in the upper house. Victory for Schroeder could mean reversal of Kohl’s minor reforms and possibly higher taxes as powerful voices on the left of his party push for expansions of the welfare state.

Whatever the election’s outcome, analysts expect the economy’s steady, albeit pedestrian, recovery to stay on course for the rest of the year, despite the Asian-led global economic crisis that is threatening to destabilise Latin America as it has done Russia.

Germany’s exposure to Russia is greater than most of its European neighbours. Its banks have seen their share prices drop recently amid the economic and political crises in Moscow, but they are not about to fold.

Similarly, the crisis in Asia is also having some effect on German industry, but not enough to stifle the recovery. Engineering firms have seen a slowdown in orders from Asia, but they insist underlying growth trends remain intact.

The biggest effect has been psychological, says one German banker. Before the crisis, the government had made a big push to promote German goods in Asia and to encourage German investment there. ‘We even saw Kohl making a series of visits to Asia. The fact that Asia’s not the gold mine it was has not helped morale in manufacturing here’, he says.

The Bundesbank, which is responsible for setting interest rates, does not appear to see big problems on the horizon. Its president Hans Tietmeyer last week hinted that he did not support calls for a concerted cut in interest rates by the G-7 industrial countries in response to the global economy’s woes.

Indeed, German rates are not seen moving this year, suggesting that Tietmeyer’s team thinks the economy can weather the storms in the global economy.

Stuart Penson